Insurance on Bank deposits: a recent amendment in law
The Union Cabinet adopted an amendment to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act on Wednesday, allowing depositors of struggling banks to access up to 5 lakh deposits within 90 days of a bank being placed under moratorium. This change, presented today at a press briefing by Finance Minister Nirmala Sitharman, would guarantee that depositors receive quick assistance.
The Union Cabinet approved amendments to deposit insurance regulations on Wednesday, allowing banks to transfer money up to Rs 5 lakh to account holders within 90 days if they fall under the RBI’s embargo.
Previously, account holders had to wait years for their savings to be protected against default if a distressed lender was liquidated or restructured.
The government has also approved a 20 per cent immediate increase in the deposit insurance rate, with a maximum increase of 50 per cent. The DICGC receives the premium from banks. In the upcoming Monsoon session of Parliament, the Centre intends to bring the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill 2021.
Finance Minister’s views
According to Finance Minister Nirmala Sitharaman, the Rs 5-lakh deposit insurance cover, which was increased from Rs 1 lakh last year, would cover 98.3% of all deposit accounts by number and 50.9 per cent of deposits by value.
According to her, deposit insurance coverage is barely 80% internationally, and it only covers 20-30% of the deposit value.
Depositors at a troubled bank, according to Sitharaman, typically have to wait 8-10 years after the bank has been completely liquidated before they can retrieve their funds. Depositors will now get insurance money within 90 days, rather than having to wait for the troubled banks to be liquidated.
Once passed by Parliament, the Bill will assist small depositors in meeting immediate financial needs.
The Deposit Insurance Corporation of India (DICGC) is a wholly-owned subsidiary of the Reserve Bank of India (RBI) that provides deposit insurance. It protects deposit accounts including savings, current, recurring, and fixed deposits up to a maximum of Rs 5 lakh per bank account holder.
If a customer’s deposit balance in a single bank exceeds Rs 5 lakh, the DICGC will only pay up to Rs 5 lakh, including principal and interest, if the bank goes bankrupt.
Bank of Karad
The government has fixed the deposit cover at Rs 1 lakh since May 1993, when it was raised from Rs 30,000 following the collapse of the Bank of Karad in Maharashtra due to a security fraud in 1992. The rise was intended to appease irate and anxious depositors of this private bank, preventing a run on even more banks.
Before the increase in the ceiling last year, deposit insurance covered around 92 per cent of all accounts in India, but just 28% of all deposits in the banking system.
The proposed law is prospective rather than retrospective, but it will apply to institutions that are currently subject to a moratorium as well as those that may be subject to one in the future. The DICGC would gather all deposit account information during the first 45 days of the bank being placed under the moratorium. It will evaluate the facts over the next 45 days and refund depositors within 90 days.
Sitharaman highlighted the government’s proposal to simplify the law in the Union Budget 2021-22, saying, “If a bank is temporarily unable to meet its commitments, depositors of such a bank can receive simple and time-bound access to their accounts to the extent of the deposit insurance cover.”
The deposit insurance premium typically paid by banks to the DICGC has been increased from 10 paise per 100 deposit to 12 paise, with a maximum of 15 paise. According to the Minister, this is merely an enabling clause, and an increase in the premium due would be determined after talks with the RBI and permission from the government.
“For PMC Bank depositors, the government has been working hard under Prime Minister Narendra Modi’s direction since 2019 to fix the problem,” she added.
The DICGC, which is a wholly-owned subsidiary of the Reserve Bank of India, insures deposits in public and private sector banks, local area banks, small finance banks, regional rural banks, cooperative banks, Indian subsidiaries of foreign banks, and payments banks (RBI). A depositor has a claim to a maximum of Rs 5 lakh per account as insurance protection in the event of a bank going bankrupt in India – even if the deposit in their account considerably exceeds Rs 5 lakh.
Banks presently pay the DICGC a minimum of 10 paise per Rs 100 in deposits as an insurance premium, which is now being raised to a minimum of 12 paise. “We believe it should not exceed 15 paise per Rs 100. We’re also making sure there’s an enabling clause in place so that if banks feel they need to raise rates, they may do so within a specifically defined limit set by the government in conjunction with the RBI,” Sitharaman added.
Depositors were prohibited from withdrawing funds immediately after the RBI imposed a ban on Yes Bank and Lakshmi Vilas Bank.
Yes Bank taking over the platform
Yes, Bank was taken over by a consortium of lenders led by the State Bank of India, while Lakshmi Vilas Bank was taken over by DBS Bank India, thanks to the RBI’s assistance. Since September 2019, another institution, Punjab & Maharashtra Cooperative Bank, has been on hold, with depositors unable to access money exceeding Rs 1 lakh. In such instances, the proposed amendment in the legislation will provide for relief.
Modifications done in the act-:
Here’s some additional information about the DICGC Act’s modification for FD account holders:
-Depositors of a bank under moratorium will no longer have to wait to access their funds under the legislation. The Union Cabinet has agreed that depositors would receive their money back in 90 days.
-Banks in trouble will have 45 days to transfer over to the insurance organization. FM stated that the procedure will be finished in 90 days without the need to wait for a conclusion.
-All commercial banks, including branches of foreign banks operating in India, will be subject to this law, which will also apply to institutions that are now subject to a moratorium.
-Sitharaman further stated that the DICGC Act will cover 98.3 per cent of all deposit accounts while providing above 50% coverage in terms of the deposit value. “Each depositor’s deposit in a bank is protected for both principal and interest up to a maximum of 5 lakh. With an increase in the insurance sum from one lakh to five lakh, India will now cover 98.3 per cent of all deposits “account,” stated the Finance Minister.
– “As a result, this clearance will provide relief to all those institutions that have previously been placed under a moratorium. It won’t go back in time, but if your bank has already been placed under a moratorium, this will cover you “she continued.
Last year, the government increased deposit insurance coverage fivefold to $5 lakh to help depositors of failing institutions such as Punjab and Maharashtra Co-operative (PMC) Bank. Following the failure of PMC Bank, Yes Bank and Lakshmi Vilas Bank also had financial difficulties, necessitating regulatory and government reform.
The Finance Minister’s budget announcement is a modification to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961. While giving details about the Cabinet meeting, Sitharaman stated that the Bill is anticipated to be tabled during the current monsoon session.
Thousands of depositors who had their money parked in strained institutions like PMC Bank and other small cooperative banks would receive immediate relief if the Bill becomes law. According to existing regulations, when a bank’s license is revoked and the liquidation procedure begins, the deposit insurance of up to $5 lakh kicks in. The Reserve Bank of India’s wholly-owned subsidiary DICGC offers insurance on bank deposits.